Corporate Diversification by Partnerships –
A case study of an entrance into eSports
Master’s Thesis 30 credits Department of Business Studies Uppsala University
Spring Semester of 2017
Date of Submission: 2017-05-30
Julia Bodin Peter Kekesi
Supervisor: Linda Wedlin
Abstract
When diversifying into new markets, companies have a wide range of strategic options to choose from. This thesis investigates reasons and drivers behind why companies use partnership as a diversification strategy when entering new markets. Using a theoretical framework composed of external and internal factors (Sánchez-Peinado & Menguzzato- Boulard, 2009) combined with Lambert’s (2008) partnership model, a single-case study was conducted on a sports marketing agency’s entry into the fast growing eSports market.
Primary data from semi-structured interviews and written internal material, together with secondary data, i.e. reports, presentations and articles, constitute the foundation of the thesis’
material. The analysis demonstrates how several factors, both external and internal, have been considered when deciding the strategy. The four drivers of Lambert’s (2008) partnership model, have moreover managed to describe the reasons behind forming a partnership in the endeavor of diversification. Furthermore, the study found high significance of additional drivers in the form of knowledge-sharing and the opportunity to gain access to a wider business network. These additional drivers are therefore recommended to be treated as separate drivers in future research. Finally, the study concludes that the increasing pace of change and therefore higher uncertainty in traditional and newly arising markets can favor the rather risk-averse strategy of partnerships, which therefore may serve as an interesting field for future research.
Keywords: diversification strategy, market entry, partnerships, partnership model, external factors, internal factors, sport industry, eSports
1 Acknowledgement
The authors would hereby like to express their sincere gratitude to those contributing to any stage of the thesis writing process. Firstly, we would like to acknowledge the efforts and critical comments and recommendations of our supervisor, who pushed us continuously towards finding ways to improve the thesis. Secondly, we are thankful for all representatives of the study object in offering their time to support us with primary and secondary data, valuable insights into the industry and market, and to reach more valuable practical and theoretical conclusions. Finally, we are grateful to our seminar team, who supported us during the entire process, provided us with insightful comments and much-valued suggestions for improvement.
2 Table of Contents
1. Introduction 3
2. Literature review 5
2.1 Factors of Diversification 5
2.2 Modes of Diversification 7
2.3 Partnerships 8
2.3.1 The Partnership Model 11
2.4 Theoretical Framework 12
3. Method 13
3.1 Written data 14
3.2 Choice of research context and respondents 15
3.2.1 Research Context 15
3.2.2 Choice of Respondents 16
3.3 Execution of interviews 18
3.4 Operationalization 19
4. Findings 20
4.1 Written data 20
4.1.1 Reports, website and internal documents by Lagardère 20
4.1.2 Public reports and articles 22
4.2 Interviews 22
4.2.1 Partnership strategy 22
4.2.2 Expectations from partnership 25
4.2.3 Partnership characteristics 27
5. Analysis and Discussion 28
5.1 General 28
5.2 Factors 29
5.2.1 Industry-related factors 29
5.2.2 Firm- and strategy-related factors 31
5.3 Drivers 34
6. Conclusions 38
6.1 Limitations 39
6.2 Future research 40
7. Reference list 41
8. Appendix 1 50
9. Appendix 2 52
3 1. Introduction
In order to sustain or increase competitive advantage and growth, companies must constantly adjust, diversify and develop their businesses and strategies (Ansoff, 1958). With the aim to progress and grow, companies have for long engaged in diversification strategies to extend their businesses with new types of activities in existing or in new markets (Ansoff, 1958).
Corporate diversification is therefore, not surprisingly, a widely studied area in strategic management, and researchers have for long discussed advantages and drawbacks of different strategic modes in the field (Sánchez-Peinado & Menguzzato-Boulard, 2009). As previous research discusses, companies typically diversify into new markets by internal development, acquisitions, joint ventures or partnerships, each having unique characteristics that make them favorable in certain situations (Chen & Hu, 2002; Datta et al., 1991; Gary, 2005).
Research has moreover tend to describe the context of a new market with factors such as growth rates, market concentration and entry barriers, as main factors behind companies’
decisions on what strategy to enter a new market with (Thompson et al., 2013; Sánchez- Peinado & Menguzzato-Boulard, 2009).
Traditionally, the strategies of internal development and acquisitions have been widely used by a high majority of companies when diversifying into new markets. Previous research have therefore to a great extent focused on these two forms of diversification strategies (Chatterjee
& Singh, 1999; Lamont & Anderson, 1985; Simmonds, 1990), thereby possibly making the motives and objectives behind the examples of acquisition and internal development easier to comprehend. As the use of partnerships as a diversification strategy started to grow just in recent decades, literature in the field still urge for more studies on its characteristics and cases when it is best to apply (Hagedoorn, 1993; Kandemir et al., 2006; Sánchez-Peinado &
Menguzzato-Boulard, 2009), making partnerships of particular interest to study. Partnerships have been described to possess the advantages of being more flexible, less costly and less risky than other entry modes into new markets (Drago, 1997). However, since a partnership is a relatively slow entry mode with small investments, companies risk to miss out on opportunities in new markets by this strategy, as competitors might use faster and higher- investment approaches (Busija et al., 1997; Drago, 1997). With this in mind, it is interesting to study why companies decide on partnership as an entry strategy into new markets, especially in newly arising markets where the opportunities are highly pronounced.
4 Although there are numerous arguments for market-specific factors being the determinants behind companies’ entry strategies in diversifying into new markets, empirical observations display how similar firms in the same industry decide on different entry modes when approaching the same new market, as can be seen in newly arising markets, like eSports
1(Business Insider, 2017; Newzoo, 2016). Lots of companies from a wide range of industries, looking for investment opportunities, are now trying to find their entry into the dynamically growing and continuously forming eSports market (Bozorgzadeh, 2017; Business Insider, 2017). Organizations from the traditional sport industry are no exceptions, and several actors have recently announced their entry into eSports, however, by using different diversification strategies. While some have used an internal development strategy (PSV, 2016), others have moved more aggressively by acquisitions (ESL gaming, 2015; Schalke04, 2016). Meanwhile, examples of collaborative diversification can be found in organizations entering the eSports market by partnerships (Lagardére, 2017a). In light of this, questions can be raised regarding what actually determines a diversification strategy.
By building on the arguments above, this study aims to investigate the factors and motives behind companies’ decisions on partnerships as a diversification strategy into newly arising markets. Due to the limited number of previous research within the field, the thesis aims to contribute to current literature by expanding the research on partnership as diversification strategy and also by considering theoretical statements in newly arising and fast growing markets, such as eSports. Furthermore, the thesis intends to provide practical examples of why partnerships can be a favorable strategy when approaching fast and stably growing markets. With this in mind, the study attempts to explain the mentioned objectives by answering the following question:
Why do companies decide to use partnership as a diversification strategy when entering newly arising and fast growing markets?
1 eSports - the market of professional video gaming.
5 2. Literature review
The literature review first presents the study's principal concepts and previous research within the depicted field of diversification strategies. Thereafter, the concept of partnerships which the study’s analysis reconnects to is described, before the theoretical framework then is presented.
In response to the need of continuous growth and development, companies constantly strive for new opportunities, where they can serve existing markets with new products, take their existing product lines to new markets, or make strategic reconstructions and start to serve new markets with differentiated product lines (Ansoff, 1965). In their attempts to diversify, companies can follow different entry modes into new markets, and there are a number of factors that influence managers in their choice on what strategy to choose (Sánchez-Peinado
& Menguzzato-Boulard, 2009).
2.1 Factors of Diversification
Motivated by today’s competitive landscape, the increasing speed of technological change, and with the aim to integrate various streams of previous research, Sánchez-Peinado and Menguzzato-Boulard (2009) developed a theoretical framework of factors related to pre-entry conditions and other firm-related factors. The conditions are categorized in three sets of factors: Industry-related factors, Firm and strategy-related factors, and Transaction-related factors, see table 1.
Industry-related factors (External)
Firm and strategy-related factors (Internal)
Transaction-related factors (Internal)
● Market growth
● Market concentration
● Marketing intensity
● Research and
Development intensity
● Degree of the firm’s diversification
● Relatedness of new market
● Tacitness of know-how being transferred
● Specificity of investment
Table 1 - Factors of Diversification, based on Sánchez-Peinado and Menguzzato-Boulard (2009)
The Industry-related factors influence diversifications by being entry barriers and by measuring the expected reactions of incumbent companies (Sharma & Kesner, 1996;
6 Thomas, 1999; Yip, 1982). While research and development (R&D) as well as marketing intensity are considered as potential entry barriers, market concentration and market growth are rather seen as reactions of companies already operating in a given market (Chatterjee, 1990; Kessides, 1986; Yip, 1982). With regards to market growth, companies need to consider the levels of uncertainty and the associated risk in the market, but also the opportunity costs that slower entry strategies to fast growing markets can raise (Hennart &
Reddy, 1997; Sánchez-Peinado & Menguzzato-Boulard, 2009). Market concentration is another factor impacting companies’ strategy, since a concentrated market may deter firms to add one more player and thus increase competition further, but also as a concentrated market only possesses a limited number of companies that an organization can cooperate with or acquire (Chang & Rosenzweig, 2001; Yip, 1982). The degrees of marketing and R&D intensity in a certain market show the height of entry barriers. If there is intense marketing activity, customers tend to be more loyal to incumbent companies, thus switching costs might be higher. If the R&D intensity is high, accessing the necessary technologies and assets to compete in the market might be difficult and costly (Anand & Kogut, 1997; Porter, 1980).
Sánchez-Peinado and Menguzzato-Boulard (2009) divide the Firm and strategy-related factors into two main categories: the degree of diversification, and the similarity and relatedness of the market that the company aims to enter compared to the company’s current markets. The degree of diversification denotes the company’s previous experience in entering new markets and taking up new types of activities, thus the flexibility of its structure and the ability to learn and adapt to new environments (Chang & Singh, 1999; Yip, 1982). The greater the experience, knowledge and adaptability of a company, the higher investment the company might undertake (Chang, 1996; March, 1991). Furthermore, Chang and Rosenzweig (2001) argue that the choice of entry strategy often is influenced by the specific company’s previous experience, meaning that diversification often occurs sequentially, and the first and later applied entry modes in the same diversification sequence are likely to be the same. The diversification strategy is furthermore influenced by the relatedness of the new market to a company’s current markets, and the factor of how much of the company’s existing resources and capabilities can be meaningfully utilized in the new set-up (Chatterjee, 1990; Yip, 1982).
When deciding on a strategy for diversification into related markets, companies further need to consider whether, and how easily, a collaborative partner can copy the practices and processes of the company and therefore erode its competitive advantage (Sánchez-Peinado &
Menguzzato-Boulard, 2009).
7 The third category of factors that impacts the choice of diversification strategy stem from the transaction itself, and are somewhat related to the organization as well (Sánchez-Peinado &
Menguzzato-Boulard 2009). One of these factors is the tacitness of the know-how that companies possess. In case the company’s expertise is context-specific and difficult to codify, transferring it entails high transaction costs and the inherent risk of revealing it to external partners (Kogut & Zander, 1992; Madhok, 1998). Finally, the specificity and repeatability of the investment can have a modifying power over different diversification strategies. If an investment is high-volume and requires many specific assets, companies might tend to follow strategies with higher dependence on external partners. However, they also have to consider the exit barriers and the dangers of revealing firm-specific assets in connection with partnering, as well as whether their current resources and capabilities suffice for independent strategies (Chang & Rosenzweig, 2001; Williamson, 1985).
2.2 Modes of Diversification
Considering the above explained multiple industry-, firm and strategy-, and transaction- specific factors, companies can decide to apply different diversification strategies. The entry into new markets can take a number of distinct forms, from high-engagement investments in internal development or acquisitions, to lower-investment modes of joint ventures or more cautious collaborative partnerships (Sánchez-Peinado & Menguzzato-Boulard, 2009).
When companies enter a related market, internal development is considered a suitable diversification mode due to the available capacities and resources to transfer tacit know-how and exploit existing firm-specific advantages in high-specificity investments (Busija et al., 1997; Yip, 1982). However, this mode is less favourable in fast growing and highly concentrated industries, due to the slowness of internal development and the fact that there is limited room for an additional player in the new market. Furthermore, other modes are prefered in industries with high entry barriers due to enhanced marketing intensity and brand loyalty to current companies, and/or high R&D requirements (Chang & Rosenzweig, 2001;
Kogut & Singh, 1988). Acquisition, on the other hand, is a rather quick strategy and therefore suitable when entering fast growing and also concentrated markets, since it does not increase competition (Chang & Rosenzweig, 2001). Moreover, acquisitions are typically favoured in companies with great previous experience of diversifications and when entering related businesses where a company can exploit its existing expertise (Kogut & Singh, 1988).
8 However, there are also disadvantages related to acquisitions, including the cost and commitment of purchasing a current market player from an already concentrated market, or for instance the difficulties connected to transferring tacit know-how to so far external parties (Chang & Rosenzweig, 2001; Stuart, 2000).
While previous literature has laid extensive focus on investigating the factors and motives behind choosing the two diversification strategies explained above, less focus has been paid to the recently more and more used diversification strategy of partnerships (Hagedoorn, 1993;
Sánchez-Peinado & Menguzzato-Boulard, 2009). However, companies nowadays more often use shared control modes in implementing their growth strategies, as market dynamism increases and the need for flexibility gets more crucial (Kandemir et al., 2006; Lee &
Cavusgil, 2006). Nevertheless, by studying the diversification strategy of hundreds of companies, Sánchez-Peinado and Menguzzato-Boulard (2009) found that regardless of the potential advantages of partnerships, the majority of companies still prefer acquisitions and other traditional diversification strategies, due to partnerships being “still an unknown strategic option [...]” (Sánchez-Peinado & Menguzzato-Boulard, 2009, p. 980).
2.3 Partnerships
Forming partnerships is not a new phenomenon in either the business world or in a broader context, but it has nevertheless gained more attention both from scholars and practitioners in recent decades (Albers et al., 2016). In generic terms, strategic alliances are defined as “an agreement between two or more organizations to work together and share resources for the benefit of the parties of the alliance [...]” (Drago, 1997, pp.53). Similar to the generalist view, but adding more layers to this definition, partnerships in the business world are seen as
“relatively enduring interfirm cooperative arrangements, involving flows and linkages that use resources and/or governance structures from autonomous organizations [...]” (Parkhe, 1993, pp. 794). Furthermore, Yoshino and Rangan (1995, pp.5) explain a strategic alliance as the alliance of at least two legally independent companies that “share benefits and managerial control over the performance of assigned tasks; and make continuing contributions in one or more strategic areas; such as technology or products [...]”.2
2 Since literature on collaborations of two or more companies often use the terms “partnerships” and “strategic alliances” interchangeably, and on behalf of simplicity and with the purpose of avoiding misconceptions, this thesis will hereinafter use the term “partnership” to describe such organizational relationship.
9 There are a number of possible motives behind companies’ engagements in partnerships.
These comprise increased production capabilities, reduced uncertainty both internally and with regards to external factors in the organization’s environment, the opportunity to develop competitive advantage and opportunities to explore new markets and jointly increase the partners’ profitabilities (Todeva & Knoke, 2005). In more concrete terms, companies engage in partnerships with the aim of market seeking, gaining access to new technologies, reaching economies of scale, sharing costs, overcoming legal barriers or legitimizing their activities (Agarwal & Ramaswami, 1992; Doz & Hamel, 2001; Harrigan, 1988). Depending on the different motives and objectives, partnerships can vary in length as well: some are meant to be short-term, for instance to accomplish a market entry, while others are designed to be long-term, as in the case of joint R&D activities or vertical integration of an industry’s value chain (Kanter, 1994).
In the struggle of reaching continuous growth and keeping firms alive, companies, especially in always changing technological or digital markets, often choose a diversification strategy either to reach niches within their industry or to extend their operations into new and/or related markets (Sebrek, 2015). Since a company’s networking capabilities are seen as a viable option to secure growth (Kogut & Kulatilaka, 1994), companies often choose to build partnerships as a way to enter into a new market or industry (Drago, 1997). There are a number of reasons why partnerships often are chosen over other types of entry modes into new areas, and these reasons can partly be found in industry- and firm-specific factors, and partly in companies’ internal motives behind diversification (Sánchez-Peinado &
Menguzzato-Boulard, 2009). The external factors of high market growth and concentrated markets favor a partnership strategy, as organizations together with incumbent companies faster can gain access and exploit opportunities than in for instance the case of internal development (Hennart & Reddy, 1997; Kogut & Singh, 1988). Furthermore, high entry barriers, such as marketing and R&D intensity, may also make partnership a preferred strategy, as companies thereby can use their partner’s brand strength and previously gained set of assets to achieve their goals (Kogut & Singh, 1988). Additionally, when a company has no active knowledge about the market aimed to be entered, entering alone could be a costly and highly risky investment (Malhotra et al., 2003). Furthermore, through partnerships, not only the costs and risks related to entering the market are shared, but firms can also decide to initially only commit themselves loosely to their partner and thus to the new market (Rothaermel & Deeds, 2004). This is further extended by the potential resource- and
10 knowledge-sharing, and the opportunity to build organizational intelligence on the know-how of partners (Grant & Baden-Fuller, 2004; Koka & Prescott, 2002). Harrison et al. (2001) argue that when the partners are similar in their nature or complement each other in available skills and resources, and these resources are integrated, the learning effect can be even bigger, creating synergies with increased productivity and efficiency. This increased efficiency and productivity, paired with the partners’ joint effort and interaction, can in turn signal and raise the degree of value created during the lifespan of the partnership (Madhok &
Tallman, 1998).
It is still of crucial importance that companies select a matching partner and prepare for shared operations, since partnerships do not only pose the danger of opening up to external firms, but also have a rather high tendency to fail within their first year(s) due to for instance the lack of trust, cooperation or strategic misfit, different expectations, management issues or changing environments (Drago, 1997; Liboni et al., 2015; Thompson et al., 2013; Zineldin &
Dodourova, 2005). Additionally, when choosing modes for collaborating with other organizations, and especially in the case of diversification, partnerships carry the great risks of losing out on opportunities that competitors with faster and more risk-seeking entry modes, such as acquisitions, more likely will reach (Busija et al., 1997; Li, 1995). Finally, transferring tacit know-how can also make partnership a less attractive strategy, since companies then must reveal their secrets and processes to a partner, and in case of a highly specific investment may find themselves at unease due to the must to adapt to the partner’s needs as well (Chang & Rosenzweig, 2001; Madhok, 1998).
Partnerships have furthermore also been discussed in literature on business networks and many researchers point out that there currently might be a new era of business networks taking place (Adner & Kapoor, 2010; Chesbrough, 2006; Nambisan & Sawhney, 2011).
Because of the technology development’s networked nature and the scattered nature of knowledge and expertise, companies can nowadays, according to Ritala et al. (2013) among others, not manage development activities by solely relying on their in-house resources, but by collaborating with external parties. According to the business network theory, developed by D’Cruz and Rugman (1992), companies can by business networks make use of resources that are owned by others than the company itself. Forsgren (2013) describes the business network theory in regards to companies’ processes into new markets, and explains how the only way to acquire the necessary knowledge of a new market is through small, gradual and
11 cautious investments. As knowledge cannot be acquired without first-hand experience, companies can with advantage gradually invest in new relationships and partnerships where the knowledge lies (Forsgren, 2013).
2.3.1 The Partnership Model
With the aim to create a deeper understanding of partnerships, Lambert (2008) developed a model to explain collaborations between businesses. He describes partnerships as tailored business relationships that are based on openness, mutual trust, shared rewards and shared risks. He moreover asserts that partnerships should result in a better performance compared to what each company can achieve individually.
The Partnership Model contains five different parts that can map out a partnership: Drivers, Facilitators, Components, Outcomes and Feedback (Lambert, 2008), see figure 1. While the Outcomes reflect the performance of the partnership, the Feedback refers to the feedback partners can provide each other when certain outcomes have been obtained. The Components are processes and activities that both build and sustain the partnership and thus are ongoing during the partnership’s implementation and existence. However, before the implementation of a partnership, there have to be reflections on purposes, expectations and circumstances.
The Facilitators refer to the environment of companies and how it might impact the partnership’s potential in succeeding. The Drivers are the compelling reasons to engage in the partnership, and therefore also represent the expected benefits that the partnership can bring.
The Drivers are moreover divided into four different categories: assets and costs efficiencies, customer service improvements, marketing advantages, and profit stability/growth. While assets and cost efficiencies are drivers meaning that the partnership will lead to a more efficient use of assets and/or costs, customer service improvement means that the partnership will create better opportunities for the engaged company to serve their customers in a better way. Marketing advantage denotes from how the companies by the partnership can be more visible and gain marketing benefits through visibility in the environment of the other company’s network or campaigns. Profit stability and growth are drivers that explain how a company by a partnership aims to gain stability in their profit and growth of their business.
All these drivers together set the expectations of the outcomes of the partnership (Lambert, 2008). Lambert (2008) stresses that these drivers moreover provide an understanding of why a partnership occurs, and also states that the stronger these drivers are, the better are the chances for a successful partnership.
12 Figure 1 - The Partnership Model (Lambert, 2008)
2.4 Theoretical Framework
As have been described in the literature section, there are several relevant aspects to study in the case of diversification strategies and partnerships, and why companies decide on different entry approaches into new markets. Due to the business environments that companies operate in, there is a need to continuously seek for diversification opportunities (Ansoff, 1958).
However, it is not obvious what diversification strategy a company should use and empirical observations show how similar companies diversify into the same market with different strategies, partnership as one. This study will therefore pay attention to why a partnerships strategy is chosen when approaching a newly arising and fast growing market, and the actual reasons behind the chosen strategy.
By using the four categories of drivers in the partnership model described by Lambert (2008), this study aims to break down, crystallize and describe the aim and purposes of the engagement in a partnership when approaching a new market. The four categories of assets/cost efficiencies, customer service improvements, marketing advantages and profit stability/growth are described as the drivers that a partnership is built on that furthermore present the expectations on the partnership. Examining these drivers will give the possibility to see what purposes are considered before deciding on a partnership strategy, and therefore
13 further create an understanding of what advantages a company sees in this strategy compared to other entry modes.
By using the four categories of the drivers in Lambert’s (2008) partnership model, the thesis does not only wishes to describe reasons behind a partnership diversification strategy, but it also intends to get an understanding of how external and internal factors, described by Sánchez-Peinado and Menguzzato-Boulard (2009) among others, can play a part when deciding the strategy. Therefore, literature on various possible factors, described by Sánchez- Peinado and Menguzzato-Boulard (2009), will be used as a lens when investigating the drivers behind the diversification strategy. By this lens, the study intends to gain an insight on what internal and external factors companies are considering when deciding on what strategy to enter a new market with. As current literature on partnership as a diversification strategy urge for more studies in the area, this study wishes to contribute to previous research by examining and gaining an understanding of why this certain strategy is chosen in the context and the circumstances presented.
3. Method
The following section describes the study's design, chosen single-case method and execution.
The section furthermore contains arguments, motivations and justifications to all methodological choices.
This study is what Saunders et al. (2012) call an exploratory study, since the research aim is to find an understanding of the context in a certain event. The study moreover operates in a methodological framework of a case study using a single-case design. In order to gain a rich understanding of the research context and of the situation being enacted, a case study strategy is considered relevant (Eisenhardt & Graebner, 2007). This strategy has moreover proved to be favorable in previous research within the fields of partnership as well as diversification, as a case study provides expositive material (D'Cruz & Rugman, 1994; Hennart & Reddy, 1997), which further strengthens the reliability of this study. A case study approach is furthermore useful in this thesis, as it has considerable abilities to answers to “why?”
questions, which is also why case studies are often used in exploratory research (Saunder et al., 2012). The usage of a single-case study is motivated by the fact that this study intends to get a deeper understanding of a phenomenon in a relatively unexplored context, also with
14 abstract characteristics (Bell & Bryman, 2015). Using an in-depth approach with a single- case will presumably provide information-rich material in which the research question can be explored in a favorable manner (Bell & Bryman, 2015).
Many case study designs use a combination of various kinds of data (Yin, 2009), which is also the case in this study. In order to strengthen the confidence of the study’s result, this thesis uses and triangulates multiple sources. In this study the triangulation is conducted by the examination of the phenomenon partly by primary data from semi-structured interviews with several individuals with different experiences (further described in section 3.3), and partly by the use of several types of primary and secondary written data, which subsequently add further perspectives to the study. The written data takes the form of articles, public reports, press releases as well as internal documents from the study object (further described in section 3.1).
A qualitative method has shown to be successful in generating detailed and intensive material in examining a single-case (Bell & Bryman, 2015). The use of semi-structured interviews is moreover considered appropriate for this study since several key questions are aimed to be answered through an interview guide with relatively broad questions, see appendix 1, while it at the same time is considered favorable with an openness for discussion and elaboration of answers (Saunders et al., 2012). If needed, the questions can moreover be supplemented by several follow-up questions that are adapted due to the obtained answers. This approach is pondered appropriate as the study aims to gain elucidative material that gives possibilities to understand the respondents and their situations better, while it also reduces the risk of misunderstanding and thus provides greater potential to better understand the context of the situations.
3.1 Written data
In order to examine the study from several perspectives, written data both in primary and secondary forms have complemented the material obtained from interviews. Initially, the study object’s website was used, which provided access to primary data in the form of historical information of the company and its previous events, financial reports, press releases and corporate documents. These documents provided possibilities for a deeper insight into the company, its financial situation and expressed reasons for its strategic moves. Besides
15 studying the company’s website thoroughly, the company’s annual financial reports and annual situation analysis presentations were used to analyze the reasons behind choosing various strategic moves. Furthermore, the interview respondents provided the researchers with several internal documents, investor relation material and presentations, that showed the company’s strategy, their analysis of possible markets to enter, including but not limited to potential entry modes and partner options. Following the respondents’ references and using various search engines, further external reports, articles and statements regarding the company, the market, and other companies’ previous diversification modes could be obtained. The written data has served as additional and complementary sources to the interviews in order to investigate what has been said about the eSports market and how it is perceived, both from the study object’s point of view and other actors in the industry. It has also served as an information provider regarding how the the study object has described and presented its strategy internally and externally. Thereby, the written data of articles, reports, press releases as well as documents, has provided additional secondary data necessary to put the primary data in a broader context.
3.2 Choice of research context and respondents
3.2.1 Research Context
Conducting research on how companies use partnerships as a diversification strategy in entering new markets is a rather broad and in itself not industry-specific field of research.
However, this study investigates the phenomenon in the context of the sport industry for several reasons. One important factor is the extreme competitiveness and therefore uncertainty in the industry (Budzinski & Satzer, 2011). In many cases only small nuances decide which team or athlete will be the winner in competitions and thereby gain increased attention from the public and the media, as well as higher volume of prizes and sponsor agreements. Meanwhile, by not winning, significant portions of the budgets will automatically be lost (Budzinski & Satzer, 2011). An additional characteristics of the sports world is the market concentration and the growing financial inequalities where the biggest clubs turn even bigger, leaving the smaller clubs behind stagnating and without chance of ever reaching their levels (Platts & Smith, 2010). For these reasons, sports organizations today aim to constantly extend their businesses into new areas where they can find new, predictable and stable revenue sources (Rockerbie & Easton, 2014).
16 One potential area where sport organizations turn today to find new revenue sources is eSports, that emerging from the video gaming industry, today comprise different teams of players organized in league structures competing for the ever-growing prizes. Thus, the industry with $0,5bn annual revenue, and an unprecedented annual growth of 40-50%, becomes not only an attractive, but an obvious market to diversify into for organizations and agencies from the similarly structured traditional sport industry (Lang, 2017; Newzoo, 2016;
Tribbey, 2016). Besides the special characteristics of the eSports market, empirical evidence shows a range of examples of different entry strategies that similar organizations from the traditional sports world have implemented when entering eSports. Since all these organizations come from the same industry and are entering the same new market, it seems apparent that the reasons for choosing an entry strategy do not only stem from the industry- specific factors, but also from firm- and strategy-specific ones. In an attempt to investigate these underlying factors specifying company’s diversification strategy, the case of Lagardère’s entry into eSports is analyzed below.
Lagardère Sports and Entertainment (LSE) is a subsidiary of the Lagardère Group, a French multinational, having the headquarter of sports in Germany. While LSE, at its current setup, was formed in 2015, the subsidiary has fifty years of expertise within sports marketing and sports management (Lagardère, n.d.). The company is to a great extent built on a wide business network within sport club management, stadiums and arena operations, as well as other types of sport competitions (Lagardère, 2015a). The global presence and embeddedness in the various business networks within the sport industry makes Lagardère a suitable study object when investigating how companies engage in partnerships to access new markets. The company recently joined a partnership with the European team Unicorns of Love (UoL) in the rapidly rising eSports market (Lagardère, 2017a), which demonstrates Lagardère’s strategy in approaching a new market through a partnership with an insider from it. However, Lagardére has a history of various kinds of diversification strategies and entry modes (Lagardére, 2017b), which makes the company even more interesting to examine in regards to the aim and research question of this study.
3.2.2 Choice of Respondents
In order to find accurate respondents with awareness of the partnership and thereby create possibilities to gain valuable material in accordance with the interview guide, a project leader within the chosen study object was approached by phone. This person could further provide
17 information and contact details to people involved in the project of the company’s new diversification into eSports, who therefore could be contacted. After getting access to several respondents from the project group, two additional persons were approached that had not been involved in the project group and the strategy discussions behind the specific partnership. The aim of including these respondents was to gain perspectives from persons outside the project, however with previous experience in the company, that could serve as additional viewpoints, and confirm or add new angles to the investigation.
Altogether, five interviews were acquired with representatives from the study object, three of which were included in the project group for the company's strategic approach to the new market, see table 2. Prior to the interviews, one hour long meetings were planned with each of the respondents, with the reason of having opportunities for deeper interviews with possibility for several follow-up questions.
Respondent Position at Lagardère Interview type Date of interview
André Fläckel (Project group representative)
Manager Digital Sponsorship
Skype interview 2017-03-28
Thomas Ottl (Project group representative)
Associate Marketing Operations
Skype interview 2017-03-30
Moritz Altmann (Project group representative)
Director of Product Management
Skype interview 2017-03-31
Saorabh Sharma Director Stadiums and Arenas
Face-to-face interview 2017-03-31
Balázs Kulin Marketing Director Face-to-face interview 2017-04-27
Table 2 - Respondents, semi-structured interviews
18 3.3 Execution of interviews
The semi-structured interviews were conducted via Skype or face-to-face, depending on the respondents’ availability to participate. Interviews have the advantage of obtaining a rich set of data that can be analyzed and further possibly provide a better understanding of the respondents' answers (Saunders et al., 2012). The interviews via Skype allowed access to important company representatives being located abroad during the execution of the study.
Although Skype interviews do not possess all the advantages of face-to-face interviews, they are more favorable than other interview forms, such as e-mail, since a more open discussion is possible in a Skype interview while it also possesses the possibility to ask immediate follow-up questions.
In addition to the Skype interviews, two face-to-face interviews were also conducted.
According to Saunders et al. (2012), in addition to providing a rich set of data, face-to-face interviews also possess the opportunity to advantageously address the respondents' reactions and gestures. However, Saunders et al. (2012) further explain how the interviewer should be careful in interpreting gestures, comments and cadency, as it might increase the risk of being perceived as biased (Saunders et al., 2012), which therefore has been taken into account during the execution of the interviews. The face-to-face interviews were conducted at one of the study object’s offices in order to let the respondents be in a familiar environment with increased chance of engaging in freer, more relaxed and comfortable conversations (Saunders et al., 2012). All interviews were conducted in English, which on the one hand contributed to the avoidance of misunderstandings and reduced the risk of missing nuances stemming from translation flaws (Saunders et al., 2012). On the other hand, since not all the respondents are English natives, forming answers in English could possibly make it more difficult to express their thoughts in the same way as they would phrase it using their mother tongue. However, as all respondents are fluent in English, the method of using the language was considered to be of advantage.
The interview guide was e-mailed to all the respondents in advance in order to give them an opportunity to prepare and give more thoughtful responses, and thus generate greater possibilities for a deeper insight. The prepared follow-up questions were not issued to the respondents together with the interview guide, in order to reduce the risk of steering and influencing the answers for the main interview questions. The researchers aimed for
19 consistency with the same person leading the interviews and the other one observing, taking notes and asking follow-up questions when warranted. Any differences, in for instance communication styles, that moreover could influence the respondents' answers, were therefore reduced during the execution of the interviews, which further ensured that the execution was conducted in a more reliable way and therefore to some extent strengthened the reliability of the study. In order to increase the validity, occasional control questions were asked during the interview to assure that the respondents’ answers were understood correctly.
All interviews were recorded, with the permission from the respondents. The interviews were moreover transcribed, which allowed a better analysis of the material since an accurate reproduction was possible and correct citation could be used (Saunders et al., 2012).
3.4 Operationalization
Using diversification and partnership literature as a theoretical lens, this study is conducted upon the four categories of drivers in the partnership model described by Lambert (2008).
The chosen drivers from Lambert (2008) are used in order to concretize and crystallize any possible purposes behind the study object’s strategy in entering a new market, while the diversification theories will contribute to understand the external and internal factors considered in this. With the internal and external factors, described by Sánchez-Peinado and Menguzzato-Boulard (2009), in mind, the study wishes to extract whether the study object has considered factors focusing on the firm and/or factors related to the market and its circumstances, when deciding the entry strategy into eSports. The theoretical lens of factors can moreover complement the drivers by adding aspects that are not solely related to the company in question. This study has mainly been carried out following, what Saunders et al.
(2012) call, an inductive approach, as the study wishes to derive conclusions from empirical experience and furthermore are lead by some ground observations, although some core arguments are developed from existing theories and previous research.
An interview guide has been designed, see appendix 1, with inspiration from Lambert’s (2008) four categories of drivers to engage in a partnership. The interview questions are formulated to cover aspects of related theories and literature on partnership in businesses and diversification strategies (Lambert, 2008; Sánchez-Peinado & Menguzzato-Boulard, 2009).
The answers from the interview questions together with supplemented written data, have
20 created conditions to extract relevant empirical material to answer the research question.
Dividing the interview guide into different subject categories led to the formulation of questions expressed in a relative broad manner, see Appendix 2, in order not to steer the answer of the respondent, but to allow more open responses. These were further supplemented by additional, pre-prepared follow-up questions for the cases when the answer was not considered specific enough. Keeping the possibility in mind that the respondents may not provide all the information they possess, the interview guide was constructed and the interviews executed in a way that it was not obvious for the respondents what content specifically was desired to be obtained.
4. Findings
The following section initially provides a presentation of how the chosen study-object and context is described by the obtained primary and secondary written data. Thereafter follows a demonstration of the primary material retrieved from semi-structured interviews. The material gathered from the latter, is structured in categories according to the interview guide presented in the method section, see appendix 1.
4.1 Written data
4.1.1 Reports, website and internal documents by Lagardère
Lagardère has a long history of diversification. According to the company’s own historical presentation, Lagardère has in more than fifty years been engaged in several different diversification modes into new markets, industries and fields. Historically, acquisitions have by far been Lagardère’s most commonly used diversification strategy, and have since 2000 accounted for more than 70 percent of the company’s different entry modes. Strategies of internal development and partnerships follow in a very similar amount thereafter, and account for 6 respectively 7 percent historically. However, the use of partnership as a diversification strategy has increased in the last decades, and 87,5 percent of the company’s total diversifications with partnership as a strategy has occurred after 2000. Meanwhile, internal developments as well as mergers have lately decreased in use (Lagardère, 2017b).
After its history of internal development, mergers, acquisitions, joint ventures and partnerships, Lagardère today offers a variety of solutions to its clients, including but not
21 limited to business planning, market research, marketing, sponsorship, digital services, and stadium and event management (LUSS, 2014a). As can be read in documents that the company distribute internally regarding new potential partners, the aim of Lagardère’s operations is to establish and expand value-adding customer relationships (LUSS, 2014a). To achieve this aim, the company acts as a sport marketing and sales agency for the mixed business-to-business and business-to-customer client base (LUSS, 2014a). The company expresses its aim of signing long-term, 10-year agreements, with strong cooperation between the involved parties where continuous growth and mutually beneficial results can be achieved (LUSS, 2014b; Lagardère, 2015a; Lagardère 2016a). Although the company’s relation with most of its clients seems organized, problems between the parties may sometimes occur, which if unsolvable, may lead to the termination of these agreements, as happened recently in the case of Friends Arena, the Swedish national stadium (Metro, 2017). Through frequent acquisitions of new rights, the company has, according to its internally created market overview report from 2017, an extensive portfolio within the sports industry (LSE, 2017).
Even though the company today has a wide portfolio of rights in the sport industry, the sport divisions has only showed small-scale growth rates in recent years, far behind the growth of most of the other divisions within Lagardère, such as Travel Retail or Publishing (Lagardére, 2015b; 2016b). These results in themselves, but also in comparison with the performance of other divisions, urge Lagardère Sports and Entertainment to embrace new opportunities.
In a news article published on Lagardère’s website in January 2017, the company declared how it is entering eSports with the purpose to extend its portfolio and to “intensify its knowledge, expertise and network that it has accumulated in the marketing of sports rights holders all over the world […]”(Lagardère, 2017a). The article moreover describes how the company’s digital department decided the entry mode to eSports after a twelve-month market analysis, with result in a partnership with the Germany-based Unicorns of Love (UoL), one of the most outstanding eSports teams in Europe, according to Lagardére (Lagardère, 2017). As stated in the article and as the company’s internal market analysis concludes, Lagardère hopes to gain access and insight into the eSports market with the help of the UoL, and further believe that it can provide a strong base for subsequent growth opportunities (Lagardère, 2016c; Lagardère 2017). By means of the partnership agreement, Lagardère becomes the exclusive marketing partner for the UoL with prime responsibilities similar to some of their other partnerships.
22 4.1.2 Public reports and articles
Various reports and articles display how eSports is a rapidly growing market that incorporates professional gaming in an (semi)-organized form. With an attempt to clarify the term eSport and to avoid misconceptions around it, a definition from the global eSport market report Newzoo (2016) can serve as guidance: eSport is “competitive gaming in an organized format: an event or league, organized by a third party, with a specific goal (i.e. winning a tournament or prize money), with a clear distinction between players and teams who are competing against each other for a chance to reach that goal [...]”. While competitive gaming and the professionalization of gaming has been a growing trend since the 1970s, a boom of the industry has been discussed since the rise of online streaming opportunities, such as Youtube and the game streaming platform Twitch (Dot ESport, 2015). According to the global eSport market report Newzoo (2016), the industry is growing rapidly both in terms of audience and revenues. In 2016, 292 million people watched eSports and the total audience is expected to reach 425 million by 2019 (Newzoo, 2016).
Newzoo (2016) moreover declares how eSports had approximately $0,5bn in revenue globally in 2016, which is a 43 percent increase compared to 2015 and 137 percent higher than in 2014. Moreover, in the foreseeable future, the drastic growth of eSports is likely to continue, crossing the $1bn threshold in annual global revenue by 2019 (Newzoo, 2016).
Compared to the major league real-life sports, the financial scope of eSport ($0,5bn in 2016) is still a fraction of major traditional sports leagues with revenues of $4-5bn in NBA3 respectively NHL4 or the entirety of European football with $30bn, which is acknowledged in another report on eSports from Deloitte (2016).
4.2 Interviews
4.2.1 Partnership strategy
All the respondents agree on how digitalization has changed the circumstances and settings in the sport industry. They describe that Lagardère is dedicated to provide value to their customers by being early adopters of innovative solutions and technologies, and seeing the changes that digitalization brought about they decided to dig deeper into digital opportunities.
Three of the respondents explain how the company built a project group of four members
3 National Basketball Association - the professional basketball league in the USA
4 National Hockey League - the professional hockey league in the USA
23 from various departments more than a year ago, with the aim to understand and find a strategy regarding the growing eSports market. The project group then began to gather information and analyze the market with the purpose of finding out if and how to approach this new field. They found that there are many similarities between the traditional sport and the eSports market: besides publishers, there are different media channels, leagues, events and teams acting as cornerstones of the eSports economy, which similar to regular sports operates by using the revenues of sponsors, partners, broadcasters, consumers and licence fees. However, the project group moreover found vital differences between sports and eSports, the main difference being that in eSports almost everything is digital, therefore, physical location, borders or facilities matter significantly less. Another important distinctive characteristic of eSports compared to traditional sports, but even to other industries, is how the game publishers own their games and therefore can decide to eliminate them at any time and thus possess a decisive power over all the leagues, teams and events organized around their games.Further differences between the two markets can be found in how the eSport is only loosely organized with little regulatory power and rudimentary gaming associations, since its roots are based and built on the gaming community. As one respondent describes it, the popularity of eSports began to emerge when people started to share (live) how they play online, and the games and players having the highest view numbers attracted the first sponsors.
Based on the project group’s market analysis, one respondent describes a growing consumer group of what he calls “digital natives” who feel that traditional sports like football and tennis are “not their thing [...]”, but rather like to play video games (often even a version of the same real-life sports) at home. With the growing group of “digital natives” as well as the distinctive characteristics of eSport per say, according to three respondents, entering the eSports market will give access to a whole new consumer group that previously has been difficult to reach.
One respondent build arguments around the attention drawn to this market and how he and his colleagues expect eSports to be bigger than basketball and ice hockey by 2020. He moreover mentions how eSports has the great potential to become the first global sport, due to its ground that is built on digital products and surfaces. In addition, it is, according to the respondent, easy to participate in gaming, since anyone with a regular computer and internet connection can join. He further explains that although the magnitude of football/soccer today is enormous, it is still not very widespread in for instance the US. On the contrary, with global connectedness to the internet, people can play these kinds of games when- and
24 wherever. Three of the respondents highlight how significant the eSports market is, how it has been growing and will continue to grow going forward, which also means that it is a great continuous opportunity for Lagardère. To quote one respondent: “It is the future!”. Two respondents also describe how the traditional sport industry has a declining growth due to the maturity of the market and how Lagardère therefore needs to extend its portfolio with something new, and the fast growing eSports market feels like an obvious possibility. One respondent moreover describes a trend of market concentration within the sport marketing industry due to the aims and opportunities of reaching scale economies. Today there are, according to this respondent, only very few players sharing a significant portion of the market, which means that if you do not invest in the new things that are coming up you will lose to others, and the “bigger sharks [...] will eat you up”.
When talking about why diversifying into the eSports market by a partnership, one of the respondents that has not been a part of the project group, explains that he is not sure why Lagardère decided to take on this strategic approach, but he can imagine that it was done in order to get to know the market more, understand it further and find some kind of niche that Lagardère could exploit. The three respondents that were involved in the project group describe the reasons behind the strategy more thoroughly. One of them explains how the eSports market is completely different from traditional sports when it comes to structure, so even if they analyzed it beforehand, they could not grasp the whole picture, and a partnership was therefore considered a good way to gain a better understanding of the eSports market. He moreover described how it can be a “soft” entering into new markets, to gain legacy and trust there, just as building up knowledge. He continues by adding that Lagardère can bring value to the partner, create a good relationship and thereby grow together with them. Three of the respondents also mention how this partnership strategy is something that Lagardère already has strong competence in, and that it therefore also felt like a very favorable, natural alternative. The company has previously done similar diversification endeavours, and according to all the respondents they might dive further into this market by gradual investments. They have already discussed possible upcoming steps and investments. One of the respondent that was not a part of the project group, however, claims that he would have done it differently if he would have decided the strategy. He means that a more aggressive approach would be more favorable, as it would provide “more money in a shorter time [...]”.
He also mentions that the eSports market is growing rapidly and “if you do not invest enough, you will continue to do what you already are doing and maybe not change or
25 innovate [...] fast enough”. This argument is supported by the other respondent who was not included in the project group, who also sees the risks in not doing investments big enough into this fast growing market and highlights that other entry modes potentially could have been more favorable.
All respondents see opportunities in getting access to a wider business network by approaching eSports with this partnership. One of the respondents explains how Lagardére gained “huge attention” just by publishing the partnership, both in the eSports market and the traditional sports market. Another one describes how their partner is a great player in the eSports market and that Lagardère therefore already is in contact with many other big actors within the market. He moreover explains how they want to grow together with the market and felt that they in a very short time have gained access to several key players.
The respondents, however, agree on the fact that other strategies also could have been used to approach the new market. One of them describes how the project group “deeply” discussed several other strategies like mergers and acquisitions, to name a few. He explains how there are pros and cons with all strategies, and that they still have other alternatives in mind, although they decided to start their entrance with this partnership after steady considerations.
The same respondent also elaborates on the risk that this partnership brings less control over Lagardère’s entrance into this new market, and that they now have to consider more factors due to the other partner than perhaps would have been the case in other strategies. Another respondent mentions the risk of putting small investments in one actor in the new market, as they by focusing to narrow on this might miss other opportunities.
4.2.2 Expectations from partnership
Regarding expectations on the partnership, all of the respondents except one, have high expectations on knowledge-sharing, while the last one does not see that at all. The latter respondent was not a part of the project group and has therefore not engaged in the discussions leading to the partnership. He stresses that their partner, has no interest in sharing its knowledge, but only cares about its own win and in gaining money with the help of Lagardère. However, the other respondent who neither was a part of the project group, can see how the partnership can provide a lot of knowledge. The other three respondents, involved in the project group, are moreover very clear about knowledge-sharing in the partnership. They all mean that they have already learned and will continue to learn from the
26 partner. One of them explains how UoL has been very open with their know-how and their knowledge about the speed of the market. He furthermore claims that not losing opportunities in a dynamic environment due to slow reaction time, is something Lagardère has to learn a lot from. Another respondent describes the “huge potential” for Lagardère to learn from this partner, to get a deeper awareness of the new market, and gain knowledge that they moreover can bring back to their current businesses in the traditional sports market.
Overall, the respondents, to a certain extent, agree on the reasons behind the partnership as an entrance strategy to the new market. They all stress that one of the aims is to become more efficient with assets and costs. However, they all mention that it is not totally clear for them yet how, or even when, this will happen since Lagardère still lacks knowledge in the new market and its structure. One respondent describes how they expect that the partnership will open up new doors and create a new structure in Lagardère in several ways, and that they thus hope to reach higher efficiency eventually.
They moreover agree on that Lagardère aims to create improvements when it comes to customer services, as the company will widen its portfolio, and as one respondent expresses it: “will reach even new target groups by new offerings […]”. Another respondent describes how one purpose also is to provide more knowledge about “new sports” to current customers, and thus bridging between traditional sports and eSports. With that said, they could improve customer service by connecting target groups from the two markets and thereby offer customers new opportunities in the other market.
The three respondents involved in the project group have more similar ideas regarding marketing advantages with this partnership, than the other two. They all describe how Lagardère might gain more brand awareness during this journey, but that it is not considered a prime purpose of the partnership. They explain that it is rather a focus on the partner when it comes to visibility and brand awareness, than on Lagardère. Anyway, the other two respondents, that moreover have been working for the company for years, see marketing advantages as a more obvious purpose, even though they have not been a part of the project group behind the entry strategy.
When it comes to profit stability and growth, they are all very clear in describing how it is one of the absolute core purposes behind this strategic approach. They all describe eSports as
